Draghi Clears Path for Euro-Area Economy as Momentum Builds
(Bloomberg) -- Mario Draghi says the euro region is firing on all cylinders, and he’s not about to get in the way.
After the IMF raised growth forecasts and the global elite in Davos heaped praise on the economy’s brighter prospects, the European Central Bank president gave his own vote of support by saying that an interest-rate increase this year is very unlikely. That’s a green light for an expansion that’s entered its fifth year.
“You could call it ‘Operation Overheat’,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “By the time Draghi walks out the front door, unemployment could be setting record euro-zone lows.”
The economy grew the fastest in a decade last year, and gross domestic product data due Tuesday will probably show a 19th consecutive quarter of expansion at the end of 2017. The region gathered momentum in January, with a Purchasing Managers’ Index suggesting quarterly growth of 1 percent and German business confidence at a record high.
Still, the euro’s ascent may yet become a thorn in the economy’s side if it curbs exports and damps prices. Much of the attention on Thursday was on Draghi’s response to U.S. Treasury Secretary Steven Mnuchin’s remarks that appeared to welcome a weaker dollar.
Draghi hit back, saying such comments may violate agreements to refrain from competitive devaluations. Despite U.S. President Donald Trump saying later that he favors a strong dollar, the U.S. currency continued its drop on Friday. The euro was up 0.5 percent at $1.2455 at 11:34 a.m. Frankfurt time, close to the highest level in more than three years.
“We live in a world where exchange rates are not to be targeted for competitive purposes and that’s what the G-20 has agreed and let’s just stick to this,” ECB Executive Board member Benoit Coeure said Friday on a Bloomberg-hosted panel at the World Economic Forum’s annual meeting in Davos. “We have seen a lot of volatility created recently by different statesmen and I think that it’s not helpful.”
Policy makers including Draghi have also pointed to the region’s improving economic outlook as a source for the euro’s strength. A survey of professional forecasters released by the ECB on Friday lifted both inflation and growth projections for 2018 and 2019.
“If you’re trying to talk down the euro, those kinds of comments are extremely unhelpful,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam.
Even with the solid pace of growth, returning inflation to the ECB’s goal still depends on central-bank stimulus, Draghi said. While he officially kept policy guidance unchanged, he added an important note on the timing of withdrawing that stimulus.
“Based on today’s data and projections, I see very few chances at all that interest rates could be raised this year,” he told reporters in Frankfurt. The ECB stuck by its plan to continue buying 30 billion euros ($37 billion) of assets a month until at least the end of September, and reiterated that rates would stay low well beyond that.
The ECB will update its forecasts for growth and inflation at its next monetary-policy meeting in March. While most economists foresee a change in the communication on the outlook for stimulus then, some members of the Governing Council are said to be pushing for a delay.
“We are predictable but we are not precommitted,” Governing Council member Francois Villeroy de Galhau, the head of France’s central bank, said in a Bloomberg Television interview on Friday in Davos. “We still have three or four monetary meetings to decide till September, so be patient.”
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